7 minute read
INVESTMENT STRATEGIES
HOW TO GET STARTED INVESTING IN CRYPTOCURRENCY
Here’s what to know about putting your dollars into Bitcoin, Ethereum or other digital currencies.
By STEPHANIE THURROTT / ILLUSTRATIONS By ASHLEY LITTLEFIELD
MAYBE YOU’VE IGNORED CRYPTOCURRENCY, THINKING IT WOULD COME AND GO LIKE THE DUTCH TULIP BUBBLE IN THE 1600S. PERHAPS YOU THOUGHT IT WAS CHILDISH, WITH ITS ADVOCATES SPORTING PIXELATED PROFILE PICS ON SOCIAL MEDIA. OR MAYBE YOU SIMPLY DIDN’T NEED ONE MORE THING TO DEAL WITH ON YOUR PLATE. BUT NOW, YOU’RE HAVING SECOND THOUGHTS AND WONDERING IF IT’S TIME TO PUT SOME OF YOUR MONEY INTO CRYPTOCURRENCY. WITH THE RECENT DOWNTURN OF THE SECTOR, YOU MAY EVEN BE THINKING IT’S A GOOD OPPORTUNITY TO GET IN WHEN PRICES ARE LOW.
BEFORE WE DIVE IN, LET’S GET SOME TERMINOLOGY OUT OF THE WAY:
• Cryptocurrency is an online form of money that isn’t backed by a government or bank. Bitcoin and Ethereum are probably the two most recognizable names in the cryptocurrency arena. But there are almost 20,000 different cryptocurrencies in existence, according to CoinMarketCap. • Blockchain is a shared database that can record cryptocurrency transactions or other transactions over linked computers. Kevin Roose of The New York Times compares it to a giant, shared Google spreadsheet. • DeFi is an abbreviation for decentralized finance or the internet-based financial system that powers the crypto world. It’s the crypto version of Wall Street, banks and traditional financial institutions.
WHERE DOES CRYPTOCURRENCY GET ITS VALUE?
If you’re thinking about investing in cryptocurrency, you probably want to be sure it’s worth something. Dollars, pounds and euros — fiat currencies — get their value from the governments that back them. For currencies that only exist on the internet, it doesn’t work like that. Let’s use the two most common types of cryptocurrencies as examples.
Bitcoin, which launched in 2009, is the oldest and most widely used cryptocurrency. It makes up about 40 percent of the total cryptocurrency market. “It’s a base currency of the crypto world,” says Benjamin Tsai, president and managing partner of digital asset management company Wave Financial. Bitcoin is the cryptocurrency that’s most like the US dollar. And as more people enter the crypto ecosystem and use Bitcoin as a reference point for value, it becomes more valuable. “That’s why you’ve seen Bitcoin really
increase in value to where it is now,” Tsai says.
Gabriella Kusz, the CEO of the Global Digital Asset and Cryptocurrency Association (Global DCA), agrees. “You have ‘In God We Trust’ written on your dollar bills. On this, it’s ‘In Technology We Trust’ or ‘In Decentralization We Trust.’ It’s a similar concept in that it’s a medium of exchange, and you’re seeing the value fluctuate over time just as you do with monetary policy fluctuations,” Kusz says.
Ethereum, the second most widely used cryptocurrency, makes up about 20 percent of the total crypto market. It works differently, getting its value from the blockchains it powers. “If you keep data on a blockchain and use Ethereum, which is the most popular place, you pay a small fee to Ethereum. When demand is high, those fees go up,” Tsai says. Why would someone use blockchains? You can use them to securely share medical data, monitor supply chains and logistics, record real estate transactions or secure personal information.
INVESTING IN CRYPTOCURRENCY MEANS HAVING A PLAN
If you’re serious about investing in cryptocurrency, you need to treat it like any other investment. “You start very small and see if this is something that aligns with your risk profile and your investment knowledge and sophistication. I know this sounds very boring, but as with any other type of investment, you need to do your own research, look at your own risk profile, consider what you’re comfortable engaging in and take it from there,” Kusz says.
Dabbling in cryptocurrency is like buying a little Tesla stock because you like your Tesla — it’s entertaining, but it’s not an organized part of your investment portfolio. “People like to talk about punting tokens, and Dogecoin and Elon Musk. That’s not really investing. That’s just speculating,” Tsai says. “It’s interesting to buy some Bitcoins or tokens or some NFTs for fun, but that’s not how I
Did You Miss the Crypto Boat?
Forbes reports that 19 of 2022’s billionaires made their money from crypto. El Salvador is planning to build Bitcoin City, where Bitcoin will power the economy. An online calculator shows you just how much you could have earned with a well-timed Bitcoin investment — $100 invested in Bitcoin 12 years ago would be worth more than $88 million today!
It’s enough to make you think it’s too late to invest in crypto. But Tsai disagrees. “I think it’s an evolving market, and I think it’s still very early. People are trying to solve problems they’re seeing in traditional finance with this new version of finance. It’s not perfect right now. Regulations aren’t quite perfectly in place, but things are moving forward. When everything is in place, and all the uncertainties are certain, that’s when it’s no longer too early.”
think about fundamentally investing.”
If you want to make cryptocurrency part of your portfolio, you can learn what they are and how they work from the videos or tutorials on their websites. For example:
• What Is Bitcoin? • What Is Ethereum?
They may even give you a little bit of that cryptocurrency so you can see how it performs in the market.
Cryptocurrencies may also have white papers on their website that explain what it is, how it functions and its purpose or value. “From there, you can take a bit more of a nuanced perspective as to whether this is an area that you’d like to participate in,” Kusz says.
HOW TO GET STARTED WITH DIY CRYPTO INVESTING
You may already have a place where you can access crypto. If you have a PayPal account or Venmo account, you can buy, sell and hold four cryptocurrencies: Bitcoin, Ethereum, Litecoin and Bitcoin Cash.
If you don’t have a PayPal or Venmo account or you want more crypto investment options, you’ll need a crypto wallet, which you can open in as little as five minutes. Search online for “crypto wallet” or “crypto exchange” to compare different places to invest, the cryptocurrencies they offer and the fees they charge. Coinbase, Gemini, Binance, Kraken and eToro are some popular options. You can also look at many cryptocurrencies at CryptoCompare, then choose a company that provides the currency you like.
You provide your information and upload identification (for anti-money-laundering purposes), and then you can make transactions on that exchange or with that wallet. “You can put in as little as a few dollars. That makes it both accessible and helps as part of the learning process,” Kusz says.
TRADITIONAL PLAYERS IN THE FINANCIAL MARKET ARE MOVING INTO THE CRYPTO FIELD
If you want to broaden your investment portfolio without doing a deep dive into the crypto world, you can see if your current financial services company offers crypto investments. More and more companies are dipping a toe into the crypto pool. For example: • This year, Fidelity will allow 401k investors to put part of their money into Bitcoin, with employers’ approval. • Charles Schwab is setting up the Schwab Crypto Economy ETF (exchange-traded fund). • Betterment has acquired Makara and plans to offer crypto portfolios.
You can also partner with an asset management company, like Tsai’s Wave Financial, that focuses exclusively on digital assets. These companies may give you broader exposure to cryptocurrencies and other digital assets such as NFTs (nonfungible tokens), which can prove that you own digital media, and stablecoins, which are cryptocurrencies pegged to traditional currencies such as the dollar, euro or yen.
This information is not tailored to the investment needs of a specific investor. Investing in digital currencies, stocks, shares and other securities, commodities, currencies and other derivative investment is speculative and carries a high level of risk. Investments fluctuate over time and you may gain or lose money. Past performance does not guarantee future results.
Is Cryptocurrency Bad for the Environment?
Even if you don’t know much about cryptocurrency, you may have heard that it uses a lot of energy. That’s true, to a certain extent. The process for mining Bitcoin consumes a lot of energy because it uses a lot of computing power to verify transactions. But according to Kusz, about half of that energy comes from renewable sources. “I’ve been pleasantly surprised at how well the industry has shifted voluntarily toward more sustainable operating processes,” she says.
A lot of Bitcoin mining was done in China and fueled by coal, and when China banned mining in 2021, many people looked for energy that was both cheaper and cleaner. “People were moving to Iceland for geothermal [energy] and moving to Brazil for hydro and geothermal [energy],” Tsai says. “The ratio is getting better.”
Ethereum is switching over to a different process, which uses a lot less energy. “It’s a much cleaner process,” Tsai says.
